Omnicell, Inc. (OMCL) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon. my name is Holly and I'll be your conference operator today. At this time, we'd like to welcome everyone to the Omnicell Second Quarter Earnings Conference Call. [Operator Instructions]. I'd now like to turn today's conference over to our host, Peter Kuipers, Chief Financial Officer; and Randall Lipps, Founder, President and Chief Executive Officer. Mr. Kuipers, I hand the floor to you.

Thank you. Good afternoon and welcome to the Omnicell Second Quarter 2017 Results Conference Call. [Operator Instructions]. Joining me today is Randall Lipps, Omnicell Founder, Chairman, President and CEO. This call will include forward-looking statements subject to risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied. For a more detailed description of the risks that impact these forward-looking statements, please refer to the information in our press release today, in the Omnicell annual report on Form 10-K filed with the SEC on February 28, 2017 and in other more recent reports filed with the SEC. Please be aware that you should not place undue reliance on any forward-looking statements made today. The date of this conference call is July 27, 2017 and all forward-looking statements made on this call are made on the beliefs of Omnicell as of this date only. Future events or simply the passage of time may cause these beliefs to change. Finally, this conference call is the property of Omnicell, Inc. and any taping, auto duplication or rebroadcast without the expressed written consent of Omnicell, Inc. is prohibited. Randall will first provide an update on our business and then I will cover our results for the second quarter of 2017 and our guidance for the year. Following our prepared remarks, we will take your questions. Our second quarter financial results are, as usual, included in our earnings announcement which was released earlier today and is posted in the Investor Relations section of our website at omnicell.com. Our prepared remarks will also be posted in the same section. Let me turn over the call to Randall.

Good afternoon, everyone. We're excited to discuss our second quarter results as well as our continued progress of the XT Series market introduction that is gaining momentum every day. Following the announcement of our new XT Series at ASHP last December, we received great responses and we experienced continued momentum from both existing and new customers. In April, we announced the launch of AcuDose software on XT hardware which allows our Aesynt customers to take full advantage of XT. And this week, we announced the launch of the XT Series Automated Supply Dispensing system. And in the second quarter, we also launched the controlled substance dispenser a module-providing, innovative, efficient and secured workflow for dispensing and administration of controlled substance. Similar to last quarter's update, I wanted to summarize our progress in 3 specific areas. First, we're winning in the marketplace across Omnicell's differentiated platform of solutions. Second, we're making good progress on XT, with strong customer interest and the XT Series is well accepted by our customers. And three, progress on conversion of G4 and AcuDose quotes and backlog to XT. First, it's clear we're winning in the marketplace. During the first half of 2017, we had strong, new and competitive conversion rate of 27% of bookings. This is a great indicator of the strength of the business. Over 70% of those were competitive conversions and the remainder were from greenfield customers who have never automated before. Given the quarter-to quarter fluctuations, we will start reporting the new and competitive conversion rate for bookings on a 12-month rolling basis. So for this past 12 rolling months, ending June 30, 2017, our new and competitive conversion rate was 28%. We're also seeing momentum in replacement and add-on XT orders, with the pipeline of replacements exceeding our internal goals. We believe that the new account strength and our installed customer base gives us a robust platform for future growth, driven by expansion, replacement and upgrade sales as well as cross-selling opportunities across our product portfolio. Second, the XT Series is very well received and accepted by customers. As of last week, we had delivered XT to approximately 320 sites which is up from 175 sites at the end of April. The XT Series is now live in over 170 sites which is up from 50 sites at the end of April. Both numbers are growing every day. Both our internal and external feedback sources indicate customers are having a very strong positive experience. As an example, a leading children's hospital, who recently installed, observed that XT Automated Dispensing system allowed them to increase medication security and availability of medications on the floor, while also decreasing the likelihood of diversion. As a result, they will be upgrading all of their existing Omnicell systems to XT. This product is being given the highest priority by their executive leadership in order to realize immediate value and will position them well for the future. Third, we're progressing well on the conversion of G4 and AcuDose quotes and backlog and are scaling XT Series revenue. Specifically, as mentioned last quarter, out of the total ADC frame revenue, we're expecting the percentage of XT Series frame revenue to increase from around 25% in the first quarter to over 40% in the second quarter, 75% in the third quarter and to around 90% in the fourth quarter. However, the second quarter XT Series frame revenue came in higher at 55% this quarter. We now expect this percentage to increase to about 80% in the third quarter and to be around 90% in the fourth quarter. We will continue to report this metric during the quarterly earnings call this year to demonstrate the execution of the XT Series rollout and adoption. Now we also announced to customers the end of shipment of the G4 hardware by September this year. That's the end of third quarter. And the end of the shipment of the AcuDose hardware by December, by the end of the year. This will allow us to consolidate and reduce the number of ADC frame assembly lines from 3 to 1. For the second quarter, non-GAAP revenue was $181 million which is above the guidance range provided in our first quarter results earnings call. Combined with good operating expense control, favorable exchange rates and tax benefits, non-GAAP EPS for the second quarter was $0.31, above our guidance range and above consensus. In the last number of years, we have successfully grown the business by implementing three scalable growth strategies, growth through the differentiated Omnicell platform, growth in new markets and growth via acquisitions. For 11 consecutive years, we have received the top honors from KLAS, the prestigious third-party rating organization, for 12 consecutive years. We have increased our market share and gained new thought leader customers every quarter. Increasingly, we're becoming a strategic business partner for our customers, developing multiyear plans to consistently deliver state-of-the-art medication management automation and workflow efficiency across the Omnicell platform for caregivers and better health outcomes for patients. In 2017 to-date, we have continued to experience great wins and have added notable customers to our Omnicell family, under our first strategic pillar of differentiated products. With several large competitive conversions, we believe that we're gaining further market share in 2017, a continuation of the market share gain trend and momentum we have experienced for many years. In the second quarter, we had some great wins with prominent new customers as well as significant deals with existing customers, including Prime Healthcare orange Regional Medical Center and White River Health System. Prime Healthcare, an award-winning national hospital system with 45 acute care hospitals, providing nearly 44,000 jobs in 14 states, recently expanded its existing partnership with Omnicell to serve a majority of its facilities within the health system. Prime is implementing Omnicell's new XT Series Automated Medication Dispensing system in 7 hospitals and is also adding to the suite of Omnicell solutions used in select sites to include anesthesia and supply offerings. As this health system continues to grow and evolve to meet new challenges, we're pleased to help them implement technologically advanced solutions to optimize operations, so they can spend more time focusing on their patients. Orange Regional Medical Center recently named a 2017 Most Wired hospital and part of the greater Hudson Valley Health System, has chosen to replace all of their existing G4 cabinets to our XT Series and will also be adding Omnicell Analytics. Orange Regional moved into its new state-of-the-art facility in 2011 that offers inpatient and outpatient services in one location. Omnicell has been working with them since the facility opened and we're pleased to support their advances in innovative patient care. White River Health System, recognized for their supply chain excellence in Arkansas, will be implementing a comprehensive set of medication management solutions on the Unity platform, including the Omnicell XT Series Automated Dispensing system, XT Anesthesia Workstation, Anywhere RN and Central Pharmacy Manager software, in its 2 hospitals and a satellite emergency department. As their system expands, they're looking to Omnicell products to help position their facility for future growth. These strategic wins in the marketplace are based on the strength of the solutions in our portfolio with a differentiated Omnicell platform. Our second strategic pillar for expanding into new markets also fueled growth in the last several years and we believe sets us up well for the coming years. Internationally, we're pleased to announce that the Hacettepe University Hospital, one of the largest, most prestigious university hospitals in Turkey, is currently implementing multiple Omnicell i.v.STATION ONCO hazardous compounding robots. These solutions will support improved safety in sterile compounding processes at the Hacettepe University Oncology Hospital. Our third strategic pillar of expanding our presence and relevance through acquisitions has also continued to deliver great results. The Aesynt integration is progressing well; the product portfolio integration is ahead of schedule, with the market introduction of AcuDose software on XT hardware announced in the second quarter; and the cost synergies are trending as expected. In addition, we're seeing good cross-selling momentum within the total product portfolio and combined customer base specifically for our IV and Performance Center solutions. In the second quarter, DCH in Alabama went live with IV automation under our RIIS program, a popular turnkey solution, where Omnicell provides an on-site service for preparing sterile IV preparations, including automation, workflow, service, implementation consulting and expertly trained personnel. We believe that the execution of our 3-leg strategy laid the foundation for our success historically and sets us up for continued future growth and scale. In today's evolving health care environment, we remain focused on our mission to change the practice of health care, with solutions that improve patient and provider outcomes. Let me turn it back over to Peter for some update on the financials.

Thank you, Randall. Our second quarter 2017 GAAP revenue of $181 million was up $30 million or up 20% sequentially, driven by the product sensation and related ramp-up of the XT Series launch and is above the guidance range provided in our first quarter results earnings call. The second quarter revenue strength was driven by XT revenue and IV Solutions, some of which is timing with the third quarter. Earnings this year, in accordance with GAAP, were at $0.02 which is up from a GAAP EPS loss of $0.03 in the second quarter of 2016. GAAP gross margin was 43% for the quarter. In addition to GAAP financial results, we report our results on a non-GAAP basis which excludes stock compensation expense and amortization of intangible assets associated with acquisitions, onetime acquisition-related expenses and the acquisition accounting impacts related to deferred revenue and inventory fair value adjustments. We use non-GAAP financial statements in addition to GAAP financial statements. Because we believe it is useful for investors to understand acquisition amortization related cost and noncash stock compensation expenses that are a component of our reported results as well as onetime events and onetime acquisition and restructuring-related expenses. A full reconciliation of our GAAP to non-GAAP results is included in our second quarter earnings press release and is posted on our website. Our second quarter 2017 non-GAAP revenues of $181 million were up 20% from the first quarter driven by, again, the XT Series market introduction and ramp-up. On a non-GAAP basis, earnings per share were $0.31 for the second quarter of 2017, above consensus, down $0.08 from the same quarter last year, but up $0.26 sequentially. Non-GAAP gross margin was 45.3% in the second quarter. The second quarter non-GAAP gross margin was negatively impacted by approximately $3 million of startup costs related to the XT ramp-up, mostly consisting of labor costs and shipping expedite costs that we don't expect to reoccur going forward. Excluding these startup costs, the non-GAAP gross margin would have been around 47%. We expect gross margin to steadily increase through the year as the XT Series will allow -- ramps up and we gain skill and efficiencies in manufacturing and installation. Non-GAAP adjusted EBITDA was $20 million for the second quarter of 2017 or up $50 million sequentially. Our business is also reported in segments, consisting of Automation & Analytics and Medication Adherence. Automation & Analytics consists of our XT and Omni -- our X Automated Dispensing Cabinets, Anesthesia Workstations, Central Pharmacy, Omnicell Supply, Omnicell Analytics and MACH4 robotic dispensing systems. Our acquisitions of Avantech, MACH4, Aesynt and InPharmics are also included in this segment. The Medication Adherence segment consists of all adherence packaged consumables which are now branded SureMed, an equipment used by pharmacists to create adherence packages as well as software solutions that aid retail pharmacies in medication synchronization and other appointment-based model solutions. Our acquisitions of MTS Medication Technologies, SurgiChem Limited and Ateb, Inc. are included in the Medication Adherence segment. As a reminder, we report certain corporate expenses that cannot be easily applied to either segment separately. On the second basis, our Automation & Analytics segment contributed $148.4 million in GAAP revenue in the second quarter of 2017, consistent with $148.5 million in the second quarter of 2016. GAAP operating income of $19 million this quarter compares to $5 million GAAP operating income in the first quarter this year and $21 million of GAAP operating income for the same quarter last year. Non-GAAP operating profit of $26 million for the second quarter compares to $36 million for the same period last year. The Medication Adherence segment contributed $32.5 million of GAAP revenue to the quarter compared to $24.2 million in the second quarter of 2016. GAAP operating profit of $200,000 compares to a $2.4 million GAAP operating loss last quarter and a $2.6 million GAAP operating profit a year ago. Non-GAAP operating income was $3 million in the second quarter compared to $4 million of non-GAAP operating income a year ago. Non-GAAP common expenses were $70.9 million compared to $90 million in the second quarter of 2016. Non-GAAP operating margin, including Aesynt and Ateb integration cost, was around 6% in the second quarter, up from around breakeven in the first quarter this year. Excluding the integration cost of approximately $2 million, the non-GAAP operating margin was around 7% for the second quarter. Non-GAAP other income and expense was a net profit of $0.5 million in the second quarter compared to a net loss of approximately $2 million in the prior quarter. The sequential increase in other income and expense was due to foreign currency remeasurement, as both the British pound and euro strengthened against the U.S. dollar and also was driven by lower interest expense due to the lower outstanding debt. We intend to develop and put in place a hedging strategy to limit the majority of the foreign exchange exposure and other income expense going forward. Let's now move to taxes. As a result of the adoption of ASU 2016-9, the excess tax benefit for stock-based compensation is now recognized as a component of tax expense rather than equity. This change resulted in an increase to our tax benefit for the quarter and a corresponding increase to our net income per share. Given the increase in stock price and year-to-date activity, the impact is more pronounced in the second quarter where it generated an added benefit of around $0.05 on both GAAP and non-GAAP EPS. We continue to expect ongoing friability in our quarterly annual tax expenses as a result of ASU 2016-9. Finally, we're assuming an annual average tax rate of around 35% to adjust GAAP tax expenses to non-GAAP tax expenses. Moving to the balance sheet and cash flow. In the second quarter of 2017, our cash balance decreased from $47 million to $27 million after paying down our outstanding debt by around $20 million in the quarter. The second quarter 2017 cash flow from operations of $11 million was strong and driven by relatively strong accounts receivable collections, especially given the lower accounts receivable balance going into the quarter and also by an increase in accounts payables and other liabilities, partially offset by inventory build of XT for future quarter installs. As of June 30, 2017, we had $200 million of outstanding funded debt and our loan leverage measured as outstanding total funded loan balance over the last 12 months of EBITDA was approximately 2.6. Accounts receivable days sales outstanding were 78, down 4 days from the first quarter driven by strong collections. Inventories at June 30, 2017 were $82 million, up $6 million from last quarter, primarily driven by an XT inventory build for future quarter installs. Our headcount was 2,348 as of June 30, 2017, down from 2,361 at March 31 of this year. During the second quarter, we executed well from a number of drivers underpinning the dynamics of the XT Series product introduction. As Randall mentioned earlier, as of last week, we have delivered XT Series to approximately 320 sites and the XT Series is live at over 170 sites and both numbers are growing every day. We also announced to customers the end of shipment of G4 hardware by September this year and the end of shipment of AcuDose hardware by December this year. As part of the next phase of the integration of the acquisition of Aesynt, we're progressing well on the creation of the following Centers of Excellence for product development and engineering and manufacturing, first of all, the Point Of Use COE in California; secondly, the Robotics and Central Pharmacy COE in Pittsburgh, Pennsylvania; and lastly, the Medication Adherence Consumables COE in St. Petersburg, Florida. During the second half of 2017, we will continue to focus on the following areas, one, accelerating bookings momentum; two, XT cost of goods sold reductions as the revenue ramps and we consolidate; three, automated dispensing cabinets assembly lines into one; thirdly, continued cost management will be a focus; and then lastly, we will implement the manufacturing Centers of Excellence mentioned earlier. Now moving to the third quarter. For the third quarter of 2017, we expect both GAAP and non-GAAP revenue to be between $188 million and $194 million. We expect the third quarter '17 non-GAAP earnings to be between $0.38 and $0.45 per share. As discussed in previous earnings calls, it's important to note that from time to time installation completion timing on larger projects can impact revenue and earnings in a given quarter, but we don't expect these quarterly fluctuations to impact the growth measured over multiple rolling quarters. Moving to 2017. We're reaffirming the total year 2017 product bookings, GAAP revenue, non-GAAP revenue and non-GAAP EPS guidance. Specifically, we expect 2017 product bookings to be between $570 million and $590 million. We expect both GAAP and non-GAAP revenue to be between $720 million and $740 million in 2017. And we expect 2017 non-GAAP earnings to be between $1.22 and $1.34 per share. Given the ramp up of XT Series revenue related profitability through the year 2017, we expect the non-GAAP operating margin, including integration cost for Aesynt, Ateb and InPharmics to increase every quarter from around breakeven in the first quarter, to 6% in the second quarter and above 15% in the fourth quarter. Excluding the integration cost for Aesynt, Ateb and InPharmics acquisitions, we expect non-GAAP operating margin for the fourth quarter to be above 50%, in line with our long term financial model. When reviewing 2017, it's important to note a couple of items included in the 2017 guidance. For 2017, our non-GAAP expected results includes approximately $10 million of integration expenses for Aesynt, Ateb and InPharmics that we do not adjust for based on our non-GAAP policy. These integration costs directly impacting non-GAAP operating margin and non-GAAP EPS, mostly consist of integration-related IT expenses, integration team and project costs, costs related to the implementation of Sarbanes-Oxley and lastly, accelerated product development integration cost. In 2017, we're expecting and are tracking to the second year cost synergies from these acquisitions of around $10 million. As we have demonstrated in the past, we're confident that we will achieve our 15% non-GAAP operating margin over time after integrating the acquired businesses and getting the full benefit of the scale of the combined business. Lastly, for 2017, we expect interest expense related to the senior secured credit facility used to finance the Aesynt, Ateb and InPharmics acquisitions, to be around $7 million or equivalent to a non-GAAP EPS headwind of around $0.11. To round out our update, I will hand the call back to Randall.

Thanks, Peter. And obviously, I'm really pleased with the quarter and the company's momentum that we have built. Of course, the XT is gaining a lot of momentum, but I don't think we should forget the Performance Center products, the IV products, the Pharmacy Central products that we have that really allows us to present a broad base of product solution sets that our larger customers want as they consolidate and not only consolidate vertically, but they consolidate horizontally into -- across the continuum of care. They need a multiple solution platform that can service all their needs in medication management and that uniquely positions us in the marketplace to win and really build a strategic relationship with our customers, not around a specific product solution but around the strategy in medication management and how outcomes can be improved, cost can be reduced and regulatory can be accomplished effectively and efficiently. So it's a lot of momentum, a lot of things have changed in the last 18 months, but it really feels good to be at this point. So with that, I'll have the operator now please, Holly, if you would open up the line for calls, please?

[Operator Instructions]. Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital.

First up for me. So it sounds like you made some progress on the implementation backlog that you noted in the first quarter. But you still have a long ways to go and I'm trying to rationalize the backlog that you're seeing as of Q2. So what you say, 170 are live out of the 320 that have -- the product delivered. So you've still got ways to go there and then I look at your guidance for Q3 and the full year, it implies a very large or a big step-up in the fourth quarter. Is that you getting caught up on that backlog? And if so, how confident are you in your team's ability to get those implementations completed?

Yes. So Matt, I'll -- this is let Pete. I'll answer that question. So yes, we definitely have good visibility in the, what we call, the installation schedules with our customers which -- for third and the fourth quarter. Of course, the visibility is greater and more detailed in the third quarter, but we also had good visibility in the fourth quarter. And you're right, so we're continuing to expect a ramp-up in revenue as a result. I'd like to point out that we're also ending shipments for G4 and AcuDose here -- hardware also here during the year, so that will help also on accelerating the focus here on XT product inflation.

Okay. And then I think you had mentioned last quarter that part of the delays of your -- or some of what was contributing to the backlog in the first quarter was some California certifications that were required. I think it was related to earthquake certification, if that's correct. Where does that stand today? And is that resolved? If not, how quickly can you get that done?

Well I think, we certainly have that issue in front of us still as it is a site-by-site issue, but we start the process immediately when we get into the account so that it's a minimal disruption. So that is some of the disruption actually in Q3 somewhat, but we've already accounted for that and we think pretty much by the end of the year or fourth quarter, that there won't be any more roadblocks in our way. So I'd say that's all accounted for and it's not going to be an issue in meeting our numbers, we don't believe.

Okay. And then maybe one last one for me and then I'll hop back in the queue. You mentioned real briefly at the end of your prepared remarks, Peter, actually, Randy, regarding Performance Center, can we get an updated customer count there and maybe what that pipeline looks like for the rest of the year?

Yes, we don't kind of break that out, but I would say that our sort of presentation and interaction with our customers has really moved quite a bit from where it has been over the years to where many of the customers are buying 2 or 3 products at a big point in time when they're either expanding or when they're adding on new hospitals or when they're replacing old equipment. And the Performance Center is becoming more and more of a standard to be included. It makes the most sense and actually when we sit down with customers, we really want to start with that product because that will give them insights on how best to deploy the automation and make sure it's effective and safe and cost-effective as we move forward. So it is a real jewel in our bag. And I think that it is one of the fastest, quickest turns on one of the fastest-growing products that we've ever deployed and developed. So we couldn't be more excited about it.

Our next question will come from the line of Nina Deka with Piper Jaffray.

So you mentioned that you are no longer going to be shipping the G4 and also the AcuDose at the end of Q4. Can you describe how this announcement was received by your customers? And whether you're expecting any level of attrition due to this announcement? And then the follow-up to that would be, what sort of efficiencies you're expecting to gain from the consolidation of the assembly lines?

Yes, great question. Because we spent a lot of time and energy and investment in ensuring there'd be minimal disruption with customers. And the way we achieve that is the G4 and AcuDose hardware, if you can think of that as -- like a hardware on a PC, is going to change. But the software is the exact same. So if you have 100 AcuDose hardware units at your location and today, you want to add one more AcuDose hardware cabinet to run with your platform, you can buy an AcuDose system, a dispensing system. But after third quarter, you can still add one, but it only comes in the form of the XT. We do not sell the previous form. But you do not have to change the software on the first 100, you can keep that software in place, but all the add-on products to that platform will be in the form of the XT hardware platform. The same is true for Omnicell G4. If you have G4 at several locations and starting at the end of the year or you want to move away from -- you can still add the XT to your G4 setup without having to replace all of your G4 in order to add on. It just means after January 1, all the add-on product will look the same, but it will either run on the AcuDose software or will actually run on the original G4 software platform, same server, same user interface. So that makes customers extremely loyal, extremely happy in that we're not forcing them to change their software platform immediately. We're only asking them to adopt the hardware platform. And of course, the hardware platform has a lot of advantages over the old platforms, so it's well received. And I don't know of any customers who have said, "Oh, I don't like that idea," or "I wasn't expecting that." So it doesn't -- it really gives our customers the ability to add on. And as they -- as the equipment ages, they flip them all out, put in the new XT hardware everywhere they don't have it already.

And then on your -- second part of the question on the cost synergies from going down and consolidating 3 Automated Dispensing Cabinets assembly lines into 1, that will definitely help the gross margin towards the very end of the year as we go into 2018, but we're not breaking that out separately.

Yes, '18, we'll have one product line for people to install. We'll have one factory build the ADCs on. So it sets us up well for '18.

And our next question will come from the line of Jamie Stockton with Wells Fargo.

This is actually Nathan in for Jamie. I guess for the first one, we've seen weaker hospital fundamentals in Q2 than expected. Have you noticed any impact on your business?

No, I don't think so. I think that the macro trends in health care, as I look at them, are the consolidation of hospitals both vertically and horizontally. That just plays more and more into our strength, the ability to run a multi -- a large, multihospital system on a single server, to have an enterprise set of products that allows you to distribute them across the horizontal platform of the continuum of care. So all of those trends -- a lot of those trends stay in place. It just continues to position us to be more effective, right? And so none of that's changed and I don't think sort of the individual hospital dynamics have that much impact on our business at all.

Okay, great. And then for a second one, does a 7-year product cycle for XT still seem like the right time period?

Yes. I think that in 7 years, that -- for sure. I mean, there might be some dribbling after that, but for sure 80% to 90%, 7 years.

Our next question will come from the line of Mohan Naidu with Oppenheimer.

This is Mike on for Mohan. Just wondering how prevalent are early upgrades from G4 to XT, like the Orange Regional deal at Greater Hudson Valley that we saw this week in your pipeline today?

Yes. Well, what we're seeing in the early -- remember, we only introduced XT in December, so we've only had 6 months really to build the pipeline. But the most encouraging thing we see a lot of pipeline growth around XT above our expectations, so we're going to end the year above what our -- we believe above our expectations on what the, actually, XT bookings originally were built into the plan which is all good news. But what happens is a lot of customers come to, what I call, a large event. They acquire another small hospital. They open up an outpatient center. They're doing something significant. And in the old world, they would have -- might have ordered just 10 more G4s, but they're looking at the dynamics and they're saying, "Well, if we want to go to this geographic location, we really need to replace the whole facility that's at that location with XT." So they'll up their order from 10 to 30, because they don't want a difference in the format of the hardware, even though they would work side-by-side. And then the G4 might stay G4 in a different location. So there's a lot of dynamics around what's going on in the facilities. So if you're opening up a brand-new facility, almost 100% of the time, we're seeing people even if they -- G4 isn't old enough to replace, they'll say let's just go ahead and replace it. We've got the new facility. Now is the time to put in the new technology instead of moving it over from the old facility. So there are a lot of situations where we see the early adopters jumping right in. And then as we take the program out to their customer base, sunsetting the G4 hardware and the AcuDose hardware, that just builds in the conversation about over the next 4 to 5 years, when they're going to replace each of the hardware pieces that are aging and need to be replaced. So I would just say that it's above our expectations. The customers have been really happy with it. In fact, one of the most interesting things about it is that if you have 2 units on the floor, you can't have the old and the new. The experience with the nurses is so above the other one that the people won't use the old one. And so they won't use the old G4. So they have to be very careful about where they place the units because of the nursing demand to quickly upgrade may be faster than the facility actually wants to or has to.

That's very helpful, Randy. And then wondering how is customer interest in the new Med Adherence solutions launched back in February, I think, the M5000, VBM 200F?

I'd say that's going extremely well above our expectations as well. I think this is still an embryonic market, but you can see it developing quickly as both people want to differentiate in the retail space and the assisted living space with solution sets that can serve large groups of people and you cannot do that without automation. And so the actual offering of the automation is driving certain customers to actually develop a plan to offer the product that they hadn't offered before. So it's a new market, a new solution set. It allows our customers to bring adherence packaging to a whole new market that they had never had the capability to. And we have gotten a lot of interest. It's still early on, but it took the automation piece to make the market viable.

Our next question will come from the line of Gene Mannheimer with Dougherty & Company.

Two questions from me. I guess when you characterize the XT opportunity previously at roughly $2 billion, is that inclusive of the supply business that you just launched on XT as well as the anesthesia station? Or are those markets incremental to that $2 billion number?

This is Peter. They're included in the $2 billion number. Now remember that, so the point also was in the prepared remarks to point out that we're now close to fully addressing that installed base and opening that up for replacements by bringing out these products [indiscernible].

Okay. Yes, now we can talk about the full line because we have the full line. So we couldn't, obviously, swap anything or book anything until we had something to offer.

Okay, good. Makes sense. And where do we stand with the group of customers that never did make the migration over to G4? How much of those customers are so-called low-hanging fruit to migrate to XT?

Those will be the G3 customers then and prior, fairly minimal number of customers there.

Yes, a few of them at the end of the year and I think at the beginning of the year took the leap into G4 upgrade just to get up the runway before they are ready for XT. But I would say there are not many customers in that mode, particularly on the pharmacy side, because you really need to have all of the feature set on the pharmacy side to be safe and efficient and beat regulatory compliance. So I'd say on the pharmacy side, there are very few people running G3.

And our final question for today will come from the line of Mitra Ramgopal with Sidoti.

Two questions also. If you can give us a sense in terms of on the international front where you're seeing the most interest on XT? And also, regarding Canada, an update on the transition with McKesson, if that's pretty much over?

This is Peter. The first part of your question, we're seeing the biggest increase in our kind of our biggest ADC markets internationally which are -- then also for XT which are the U.K. and the Middle East. So we see some good traction there. And then your last -- sorry, the second part of your question was, Mitra?

In Canada.

In Canada.

Yes, we just announced -- yes, I'd still say -- yes, just this April, we basically...

We took over the accounts essentially.

We took the AcuDose accounts that were in the McKesson. That was an exclusive agreement that Aesynt had with McKesson before we acquired Aesynt. And now we've taken over those accounts from a selling point of view. They are still servicing the accounts. So there's a transition over the 6 months to a year, where we will take full account control, if you will. But I think in Canada, we're really set, because we have Aesynt. AcuDose products has a good reputation. Omnicell has a great reputation and I think the combination of the 2 really puts us in a really strong place to continue the great, great momentum we've had there over the last several years actually.

I'll now turn the call over to Randall Lipps for closing comments.

Well, really appreciate everyone joining us again today and continuing here the XT -- the story. But as I said, the story is a lot larger than that and it's a great time to be in health care. It's a great time to be taking technology and introducing an end to the world health care and really changing peoples lives, really changing what takes place with the medication management. And it truly is a way to bend the cost curve and just -- we -- our passion around it and our ability to change people's lives is probably the most exciting part of what we do every day. And as always, thanks for the Omnicell team for driving all the hard work and going through this last few quarters, where we had so much going on. We still got a lot more going on, but I'm always grateful for the great things you do. We'll see you guys next time.

Thank you.

Once again, we'd like to thank you for participating on today's conference call. You may now disconnect.